Money in the Garbage

Dimitri is my stock and strategy czar. I say “czar” because of two reasons: One is that he originally hails from Moscow--a place that he endearingly calls The Gulag, and two, his word cannot be refuted. In short, he's a sullen dude but with the cool, exotic looks of a tall-dark-'n'-handsome Rasputin with piercing blue eyes. He's been the source of some heart fluttering among my female friends, but seems to have the opposite effect on Fifi who shoots him a wary eye when he isn't looking. Historically, there has been friction between the French and Russians, and, alas, history seems to be replaying itself in my presence.

Well, last week Dimitri and I were sitting around reviewing a few of Dimitri's new stock strategies while Fifi took her morning “The Young and The Restless” break. (Fifi now wants to move to Wisconsin because she thinks that everyone there is thin, gorgeous, and wears designer duds to milk the cows.) The preliminary results from the strategies were less than encouraging, and both Dimitri and I looked a little disheartened. Apparently, Fifi wasn't as engrossed in her soap opera as we thought she was, and she turned her head at the commercial break to announce that Dimitri's strategies were “garbage” which made him turn red. But it gave me an inspiration. Before Dimitri could swat Fifi with a rolled-up Wall Street Journal, I leapt up and said, “Have we ever looked at really cruddy stocks before? You know, the ones that trade on sheets so pink they might as well be maroon?”

Both Dimitri and Fifi shot me looks like I had just lost all my marbles but I went on, saying that I know how risky trading these stocks can be, but might not the potential upside be enormous? How about we look at stocks whose value is greater than its current price? Starting to warm to this idea, Dimitri said that he'd run with it.

Preliminary Results

Two tests were run: one during the Up market cycle from 9/27/07 to 11/2/07, and the other during the current Down cycle from 11/2/07 to 1/25/08. Here are the results:

9/27/07-11/2/07 (Up Market)
Avg. Annualized Rate of Return: 262%
#Winners: 21
#Losers: 25
#Break-Even: 54

11/2/07 - 1/25/08 (Down Market)
Avg. Annualized Rate of Return: 11%
#Winners: 15
#Losers: 38
#Break-Even: 47

The vast majority of the stocks that appeared in these tests traded under just a few pennies with most of them trading in the “centa-cents,” or hundreths of a penny. During the Up market phase, we found that the winners boasted huge gains. Ten of them gained over 1000% with one gaining an astronomical 20,000%. Conversely, the losers were large, too, but none of them topped a 1000% loss. Clearly, we were onto something that required further investigation.

Later today, I'll post how we refined the search further and honed in on only the winning stocks. I'll also give my perspective on actually implementing such an approach. For now, garbage rules!

Posted by Dr. Kris at 1:18 PST